Friday Economic Snapshot: Fed to continue stimulus

Good day! This week’s economic headlines have been dominated by the Federal Reserve, which announced that it will continue pumping $85 billion into the bond market for the moment, but hopes to “taper” its bond purchases in the future as the American economy continues its slow mend.

This cautiously good news led to a massive two-day sell-off in global stock markets as some fear what impact this reduction of government financial support may have on other aspects of the economy, including the bond market.

Further convoluting this good-news-tanks-the-markets mentality, Wells Fargo CEO, John Stumpf, cheered the feds action saying that normalizing interest rates will be good for the economy. It’s not often we look to mega-banks as a voice of reason, but Stumpf’s thinking is buoyed by significant progress in the housing market that has aided his bank’s balance sheet.

Indeed, this is a tricky week to be interpreting the tea leaves. So let’s get to it.

Fed Action

Citing moderate economic growth and an improving job market, along with diminishing risks to the economic outlook going forward, the Fed announced it will continue purchasing mortgage-backed securities and Treasuries in the near future. Beyond that, however, it opened the door to reducing such purchases as the economic recovery continues gaining steam.

From the report: “To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.”

Some economists have speculated that this drawdown in stimulating purchases could begin in September, possibly reducing monthly stimulus to $65 billion. The price of gold also tumbled in the days following the Fed’s statements.

Business Outlook Survey

This week’s other big report, the Business Outlook Survey from the Federal Reserve Bank of Philadelphia, was released on Thursday and offered an even more positive forecast that calls for manufacturing growth to continue over the next six months.

“The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from -5.2 in May to 12.5, its highest reading since April 2011,” read the report. “The percentage of firms expecting increases in activity over the next six months (45 percent) exceeded the percentage expecting decreases (12 percent) by a significant margin.”

This survey points to good things in terms of future manufacturing shipments and new orders, both of which historically can lead to widespread economic gains in many sectors.

Existing Home Sales

The National Association of Realtors reported rising existing-homes sales figures for May, accompanied by double-digit price increases. These positive results marks the U.S. real estate market’s healthiest numbers since November 2009, when buyers took advantage of tax stimulus.

From the report: “Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 4.2 percent to a seasonally adjusted annual rate of 5.18 million in May from 4.97 million in April, and is 12.9 percent above the 4.59 million-unit pace in May 2012.”

“The housing numbers are overwhelmingly positive. However, the number of available homes is unlikely to grow, despite a nice gain in May, unless new home construction ramps up quickly by an additional 50 percent,” said Lawrence Yun, NAR chief economist. “The home price growth is too fast, and only additional supply from new homebuilding can moderate future price growth.”

Takeaway

It’s fascinating when an optimistic outlook leads to negative short-term consequences, but it wouldn’t be the modern economy if it were straightforward.

As noted in previous weeks, the global financial system still looks shaky from Japan’s alleged currency manipulation to China’s quickly slowing economy, but America keeps improving in the almost all of the crucial areas: manufacturing, real estate, GDP and consumer sentiment.

When this will start to really change the unemployment situation remains to be seen. Weekly initial unemployment claims increased to 354,000 — while that’s a jump from last week’s 336,000, it’s not outside the range of where we’ve hovered since the start of 2013.

Things are looking strong; so pay no mind to the undulating stock market. Investors will likely get back in the game as worries for the bond market give way to well founded optimism.

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